Category: ESG

The Financial Economist Roundtable weighs in on the SEC’s proposed climate-related disclosure rules. Their advice: limit rules to ESG related-cash flows and avoid “proxy legislation” of social and environmental policy.

https://www.tandfonline.com/doi/full/10.1080/0015198X.2022.2044718

The Financial Economist Roundtable (FER) is a group of senior financial economists who have made significant contributions to the finance literature and seek to apply their knowledge to current policy debates. FER was founded in 1993 and meets annually. Members attending an FER meeting discuss specific policy issues on which the FER may adopt statements. When the FER issues a statement, it reflects a consensus among at least two-thirds of the attending members, and all the members who sign it support it. The list of signatories for the 2021 statement can be found at http://www.financialeconomistsroundtable.com/.

Tariq Fancy, the former head of sustainable investing at Blackrock, has been making the rounds recently in the media as the ESG iconoclast alleging the “danger” of ESG and the “placebo effect” of ESG. His main point though is that ESG is no substitute for government policy (e.g. regulation). See CNBC for recent article:

https://www.cnbc.com/2021/08/24/blackrocks-former-sustainable-investing-chief-says-esg-is-a-dangerous-placebo.html

While I applaud anyone for taking on any establishment, especially one that clearly has such a substantially large dog in this race, and I am in violent agreement with his baseline argument for well reasoned policy such as a carbon tax to bring about comprehensive systemic and aggressive action on climate (and without taking up the space of the three part essay on Medium he has written recently to convey his main arguments), I think he is missing the point in two ways:

1. Climate change (and other sustainability challenges) require market-based solutions, and capital is an inextricable part of a market system. Fancy’s main argument is that ESG is a non-solution, and risks lulling people into a sense of complacency. The 90% of public companies that now feel compelled to report ESG metrics today to investors are likely to disagree. Furthermore, companies, not governments, will drive the technologies and solutions to these major issues, and these are funded by capital. Capital allocation will be determined by folks who must be equipped to understand ESG issues. Competition in the market will continue to reward those providing the best solutions. This is not to say there won’t be winners and losers, such is the nature of Shumpeter’s process of “creative destruction”, which underlies the general overall success of capitalism in addressing global challenges. Attacking ESG on this point is tantamount to saying don’t bother entering a race because you have no chance of taking first place, when success is likely to be defined not by a single winner, but by having most people simply enter the race.
2. Businesses, consumers and governments are the source of the problem, and capital has successfully raised the issue in a way that scientists and environmentalists have struggled for decades to accomplish, and over a much shorter timeframe.

None of this, of course, absolves any of us from our personal responsibilities to become better managers, consumers, policymakers, voters or investors. One of my biggest complaints about the ESG movement is the “outsourced” nature of personal responsibility (e.g., the investor who invests in a general ESG kind-of-way and then turns around and purchases a gas-guzzling cigarette boat, without the attendant offsets, of course). Fancy is also right in saying that until we have comprehensive policy like a carbon tax, this will continue to be a game of “whack-a-mole”: Companies divesting of oil and gas assets (i.e. BHP as a recent example) while laudable, still see those assets going to another owner, who will continue extraction, so long as there is a market for fossil fuel. For fossil to be replaced entirely it must be priced out of the market by something else, ergo a carbon tax to drive and enforce that change. Graduation of a carbon tax can ease a transition, and give companies and households time to absorb that transition.